SMCRF&P Framework: A Practical Guide

OVERVIEW

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SMCR – brief recap

F&P standards and framework

F&P monitoring and assessments

Some common questions / issues

Practicalities

Useful reference guides

OVERVIEW OF THE SMCR

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The new regulatory framework for individuals (replacing the Approved Persons Regime), comprising of three key elements:

1. The Senior Managers Regime – approval regime for individuals performing “Senior Management Functions” (broadly, roles (potentially) involving a risk of serious consequences for the firm or business)

2. The Certification Regime – firms solely responsible for assessing the fitness and propriety of employees who could pose a risk of significant harm to the firm or its customers

3. The Conduct Rules – basic conduct standards applicable to most employees of the firm (save for purely administrative staff)

APPROVED PERSONS REGIME V SMCR (BEFORE & AFTER)

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SIFs

Customer Function

All other employees

Approved Persons RegimePrior regulatory approval requiredStatements of Principle for Approved Persons apply

SeniorManagers

Certified Persons

Conduct Rules staff

Employees involved in the provision of “ancillary” services only

Senior Managers RegimePrior regulatory approval required; must be assessed as fit and proper by the firm both initially and on at least an annual basis

Certification RegimeNot subject to prior regulatory approval; must be certified as fit and proper by the firm both initially and on at least an annual basis

Only Conduct Rules apply

Not subject to Conduct Rules

Individual Conduct Rules apply

Approved Persons Regime SMCR

Individual and Senior Manager Conduct Rules apply

Fit and Proper requirements apply (including rules on Regulatory References)

SUMMARY OF THE REGIME

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Senior Manager Conduct

Rules

Senior Manager’s Regime

Fit and proper requirements

(including Regulatory

References)

The most senior people in firms (broadly, at Board and ExCo levels). Anyone whoperforms a Senior Management Function must be pre-approved (as ‘fit and proper’)by the FCA.

Core requirements:

Senior Management

Functions

Duty of Responsibility

Statement of Responsibilities

Criminal Records Checks

Prescribed Responsibilities (Limited Scope

Firms don’t need to do this)

Extra requirements that only enhanced firms need to meet:

Additional Senior

Management Functions

Additional Prescribed

Responsibilities

Responsibilities Maps

Handover Procedures

Overall Responsibility

Individual Conduct

Rules

Certification RegimePeople who are not Senior Managers, but whose job can none the less causesignificant harm to the firm or its customers. Firms must assess and confirm thatthese people are suitable to do their job (i.e. ‘fit and proper’) at least once a year.

Other StaffAll staff who perform financial services roles. This excludes ancillary staff (forexample, caterers, cleaners, and security staff).

THE CERTIFICATION REGIME

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Code Staff under the Remuneration Codes

Anyone performing a Significant Management Function

Anyone performing the CASS oversight function

Certain proprietary traders

Individuals performing client-dealing or algorithmic trading activities

Individuals in customer-facing roles that are subject to qualification requirements

Anyone who supervises or manages a Certified Person directly or indirectly (if not a Senior Manager)

F&P STANDARDS AND FRAMEWORK

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Firms need to assess F&P in relation to:

Senior Managers

Non-Executive Directors (who are not otherwise Senior Managers)

Certified Persons

An assessment needs to be made both initially and on an ongoing basis (at least annually – and on an ad hoc basis if a material issue comes to light)

New roles – F&P trigger?

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F&P STANDARDS AND FRAMEWORK

What is new?

Firms must assess F&P in relation to a broader range of individuals

Firms will be solely responsible for assessing F&P in relation to Certified Persons

Firms will need to perform regular F&P assessments (including in relation to Senior Managers)

Transitional arrangements mean that firms will have one year from commencement to complete certification of the existing population of Certified Persons (new joiners during this period will need to be certified before commencing their role)

Note: SMFs and Certified Persons will also need to be trained on the Conduct Rules prior to 9 December 2019

F&P STANDARDS AND FRAMEWORK

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The Fit & Proper “pillars” – no change per se

Honesty, integrity and reputation

Competence and capability

Financial soundness

Some illustrative examples

See FIT 2

Banking Standards Board’s Supporting Guidance to Statement of Good Practice 1 offers suggested definitions of the 3 pillars

Note: FCA’s recently published views on the relevance of non-financial misconduct

F&P MONITORING AND ASSESSMENTS

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When to conduct an F&P assessment

Onboarding

When joining the firm or taking on a new role within the firm

Annually

Part of the required annual assessment

Ad hoc

When there is a “trigger event” such as the outcome of disciplinary proceedings

F&P MONITORING AND ASSESSMENTS

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Ongoing F&P assessment

Disciplinary action (if any)

Conduct Rule

breaches (if any)

Annual appraisal &

self-attestation

Any other relevant evidence

Refreshed Criminal Records Checks

Initial F&P assessment

Other evidence &

self-attestation

Criminal Records Check

Regulatory Reference

F&P MONITORING AND ASSESSMENTS

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How do we assess F&P?

FCA requires that a firm must have particular regard to whether the individual:

has obtained a qualification; or has undergone, or is undergoing, training; or possesses a level of competence; or has the personal characteristics; required by general rules made by the FCA.

Firms should also consider:

The nature, scale and complexity of the business, the nature and range of financial services and activities undertaken in the course of that business; and

Whether the individual has the knowledge, skills and experience to perform the specific role that the individual is intended to perform.

Firms also need to think about focusing on positive qualities and behaviours – not just looking for absence of negative behaviour

F&P MONITORING AND ASSESSMENTS

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Ongoing monitoring

F&P assessment typically will dove-tail with the annual appraisal process. However, F&P must be considered on a continual basis – and should be revisited if material concerns come to light

Firms must ensure there are processes / protocols in place so that relevant “triggers” prompt an additional F&P assessment

F&P MONITORING AND ASSESSMENTS

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Notification obligations

A firm is required to notify the FCA (as soon as practicable – ideally, within 1 business day of the firm becoming aware) if it intends to submit a qualified Form C – which circumstances include the firm having information which reasonably suggests that it may affect the FCA’s assessment of a Senior Manager’s F&P (SUP 10C.14.7R(2)(c))

If a firm becomes aware of information which would reasonably be material to the assessment of the fitness and propriety of a Senior Manager, it must inform the FCA as soon as practicable and, in any case, within seven business days (SUP 10C.14.18R)

Firms have an obligation to notify the FCA when they take disciplinary action as a result of a breach of the Conduct Rules (Section 63C FSMA) – the timing of the notification differs depending on whether the action concerns a Senior Manager or Certified Person (annually)

Firms will also need to consider whether they need to make a notification under Principle 11

If an investigation reveals an issue that also relates to individuals who have left the firm, the firm must consider whether it needs to update any regulatory references it has previously provided

WORKED EXAMPLE – DISCIPLINARIES AND F&P

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Breach of Conduct Rules?

No FCA Notification

FCA Notification

Impact on F&PAssessment?

Yes No

HR Record the Decision

No

Yes

Feed into F&PAnnual Assessment

Consider if immediate “in-year” F&P

assessment required?

Employee calls in sick but spotted at

the races

SOME COMMON QUESTIONS / ISSUES

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Who should perform an F&P assessment?

Systems capabilities

Coordination is key (especially between Compliance and HR)

Importance of consistency across:

FCA forms submitted Regulatory references FCA notifications Any relevant public statements

Alignment with existing processes (e.g. disciplinary and appraisal)

Need to avoid any potential for bias / conflicts of interest

PRACTICALITIES

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F&P policy / protocol

Consistency (pass / fail criteria) Comprehensiveness of data feeds (must cover all 3 pillars) Guidance on significance In-year assessment triggers Legislating for grey / difficult scenarios (escalation process, appeals)

Periodic assessor training

Internal Audit F&P framework effectiveness reviews

Use of self-attestations

Scope of coverage

On-going monitoring of Certified Person population – must remain up-to-date

SUMMARY OF REQUIREMENTS

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Information

• Ensure appropriate information feeds into the F&P process• Ensure processes are joined up and that an assessment is triggered in year if necessary

Assessment

• Ensure assessors are properly trained and know how to evaluate the information• Establish a framework to ensure that decisions are consistent and fair

Records

• Record sources of information used and rationale behind all decisions• Ensure information is kept to feed into regulatory references

USEFUL REFERENCE GUIDES

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Banking Standards Board (BSB): Statement of Good Practice 1 (28 February 2017)

BSB: Supporting Guidance to Statement of Good Practice 1 (28 February 2017)

BSB: Supporting Guidance to Statement of Good Practice 1 (20 February 2018)

QUESTIONS

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